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Investment Thesis
ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) is a globally operating container liner shipping company headquartered in Israel. The company recently announced it was opening a fully-owned agency in New Zealand, which I believe can strengthen its networks connecting Asia, New Zealand, and Australia and accelerate its growth by increasing trade activities.
About ZIM
ZIM is a container liner shipping business that is operated globally in approximately 100 countries. The company currently handles a fleet of 149 vessels and also owns shipping containers. It mainly operates in five geographic trade zones: Pacific, Cross Suez, Atlantic, Intra-Asia, and Latin America. Trading activities between Asian regions such as China, Southeast Asia, Korea, the Indian subcontinent, and significant parts of the Caribbean, Gulf of Mexico, Central America, and the east and west coasts of the United States and Canada are covered by the Pacific geographical trade zone. The Cross-Suez geographic trade zone focuses on covering trade activities between Asia and Europe. These trading activities are mainly carried out through the Suez Canal, focusing on key strategic zones of the East-Mediterranean Sea. The Atlantic Europe trade zone facilitates trading activities between North America and the Mediterranean, including Intra Europe trade. The Intra-Asia trade zone consists of trading activities in Asia, Australia, and African port regions. This zone has experienced constant sustainable growth for several years. The Latin America geographic trade zone serves the Intra-America trade that covers regional ports in America. It also facilitates trading activities between the South American east coast, Asia, and West Mediterranean.
New Agency In New Zealand
Asian regions are currently considered the fastest-growing markets in the shipping industry. This growth is mainly fueled by strong economies such as India and China. In addition, the government policies in many countries to support this industry have helped boost trading activities. Similarly, New Zealand is also experiencing a strong rebound in the shipping industry after the pandemic due to increased trading activities.
All these factors have hugely contributed to the company’s financial growth in the current year. To sustain this growth in the rapidly growing market, ZIM Integrated Shipping Services recently opened a fully-owned agency in New Zealand to expand its operations in the growth markets. This expansion can highly benefit the company by strengthening the networks connecting Asia, New Zealand, and Australia and addressing the growing demand. All these regions are highly fragmented with various local and international players, and this expansion can make the company competitively strong by covering major regional ports.
I believe this new agency can significantly help the company to focus on capturing a large portion of market share by leveraging its strong improved networking capabilities and executing more attractive trades, which can further help it to expand its profitability and expect a long-term upside. This growth is further expected to sustain as a result of increasing demand, and as per Container Trade Statistics, demand in this trade zone has seen significant growth over the last several years and is estimated to continue to grow in the future. In addition, the company has also started offering new services, such as car carrier activities and digital freight forwarding subsidiaries, which can lead to more revenue streams and act as a supporting catalyst to increase its profitability.
Financials
The company recently announced its third-quarter results. It reported revenue of $3.23 billion, which is a 3% YoY growth compared to $3.14 billion. Net income saw a 19.86% YoY decrease, from $1.46 billion to $1.17 billion. Decreased net income has resulted in diluted EPS of $9.66, which is a 20.55% decrease compared to $12.16 in Q3 2021. Adjusted EBITDA and EBIT stood at $1.93 billion and $1.54 billion, respectively, compared to $2.08 billion and $1.86 billion in the last year. Net cash generated from operating activities decreased by 16.91% compared to the same quarter of the previous year.
The company ended its third quarter with $1.28 billion in cash and cash equivalents and $250 million in net debt. Capital expenditures decreased by 78.69% compared to the previous year. Comparatively, this quarter was weaker than the previous year, which was due to elevated freight prices that increased the bunkering and vessel chartering costs. After the third quarter results, the company revised its guidance for FY2022. It now expects adjusted EBITDA in the range of $7.4 billion – $7.7 billion and adjusted EBIT in the range of $6.0 billion- $6.3 billion.
I think the company’s estimates are conservative, and it can perform better as it has recently strengthened its network in growing markets. After considering all of these factors, I estimate adjusted EBITDA in the range of $7.6 billion – $7.9 billion, and adjusted EBIT can be in the range of $6.1 billion – $7.3 billion. I expect the EPS for this year to be between $44 – $46 with estimated EBITDA and adjusted EBIT.
What Is The Main Risk Faced By ZIM?
Dependency on China
Intra-Asian commerce alone accounts for at least one-fourth of the worldwide market, according to the world shipping council (WSC), and the Asia trade regions constitute almost 70% of the total TEUs of international container traffic. Although ZIM has operations throughout Asia, the Far East, and Southeast Asia (including Vietnam, South Korea, and Thailand), a sizable amount of its business originates in China. Therefore, the volume of imports and exports into and out of China is a determining factor for ZIM. Trade restrictions have decreased bilateral trade between the U.S. and China, increased trade tensions between the U.S. and China, changed the structure of trade, and decreased container trade.
Furthermore, since China exports far more goods than it imports, any decrease in or obstruction to China-based exports, whether brought on by a decline in global demand, a slowdown in China’s economy, a seasonal decline in manufacturing due to the Chinese New Year holiday, or other factors, could have a materially negative impact on ZIM’s operations. For instance, the Chinese government has recently enacted national security measures for Hong Kong and economic policies intended to boost domestic consumption of goods made in China, both of which may have the potential to reduce the supply of goods available for export and, consequently, the demand for cargo shipping.
China has gradually shifted toward a “market economy,” enterprise reform, and an increase in economic autonomy in recent years. Although many of the enacted reforms, notably some price restriction reforms, are novel or experimental, they could be revised, altered, or even repealed. Changes in these economic reforms by the Chinese government, as well as changes in the political, economic, and social situations, or other pertinent policies of the Chinese government, could have a negative impact on the volume of imports into and exports from China. Changes in laws and regulations, particularly those pertaining to taxes and their execution by local authorities, may impact ZIM’s ships calling on Chinese ports, which may negatively impact the company’s operations, financial situation, and business.
Valuation
The company recently announced opening a new agency in New Zealand, which I believe can strengthen its networks connecting Asia, Australia, and New Zealand and further boost the trading activities in these trade zones. It has also started various new services to improve its port coverage which can increase its revenue streams. After considering all the above factors, I am estimating the EPS of FY2022 to be $46, which gives the forward P/E ratio of 0.55x. After comparing the forward P/E ratio of 0.54x with the sector median of 17.02x, I think the company is undervalued.
Conclusion
ZIM Integrated Shipping Services is a container liner shipping company headquartered in Israel and operates in various global trade zones, exposing it to the risk of exchange rate fluctuations. The company has reported its third-quarter results, which are comparatively weaker than the previous year’s third quarter due to elevated freight rates. ZIM has recently announced the opening a new agency in New Zealand, which I believe can accelerate its growth by strengthening its network connecting Asia, New Zealand, and Australia, further boosting its trading activities and resulting in higher profit margins in the coming years. After comparing the forward P/E ratio of 0.54x with the sector median of 17.02x, I think the company is undervalued. After considering all the above factors, I assign a buy rating to ZIM Integrated Shipping Services Ltd.
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